Citi determined that, with costs as they are, it takes an
emerging hedge fund manager at least $300 million AUM just to
break even. Basically, if you have less than $1 billion, you
shouldn't even get out of bed.

The biggest cost of all the monster costs is compensation for the
compliance personnel that keep you straight with the Feds. Size
is a huge advantage there too.

From Citi:

For small hedge funds with only $100 million AUM, compensation
accounted for 8.7 basis points ($87,000) out of total expenses of
17.7 basis points ($177,000)—49% of total compliance expense...

Overall dollar-based costs of compliance rise only modestly, from
$177,000 to $210,000 as hedge funds move from $100 million to
$500 million AUM, but the composition of those costs is quite
different. Expenditures on software and other third-party
services shrinks from 51% to only 23% of compliance spend. This
share continues to decline at every progressive AUM level within
the institutional category, falling to only 6% for firms with
$10.0 billion AUM.

All that's not even the worst part. What really might get kids to
go back to dreaming of being astronauts instead of hedge fund
managers is that management fees are collapsing.

Unless you're a rock star hedge fund manager, clients will not
pay you the infamous "2% and 20%" hedge fund compensation scheme.
Here's what Citi has to say about compensation for hedge funds
with $5 billion AUM or less:

Average management fees continue well below the historical 2.0%
level, ranging from 1.58% to highs
of only 1.76% for the largest firms in this band. Management
company expenses dip and stabilize,
ranging from 63 to 68 basis points. No appreciable economies of
scale are realized by firms in the institutional category, as
this is a period of ongoing investment into upgrading the firms’
capabilities
and expanding their teams. During this phase of growth, headcount
grows by ~2.0x for every ~3.0x
increase in AUM.

So what's the solution if you still want to be an investor?
Franchising. Big shops with hedge funds within them. Citi found
that firms that fit this description have an average AUM of $36.4
billion, and that only about 53% of their business is focused on
the hedge fund.

Or you could just be David Tepper from day one. That's the other
solution.